Monday, August 23, 2010

China has woken up-as predicted its economic growth has shocked and awed the world. There is a saying in the Red Army that quantity has a quality all its own. China today is investing nearly half its GDP, something that is simply unprecedented. Over 200 years of economic experience tells us that hyper-investment creates a bubble and ends in a dreadful collapse. But China has consistently defied all such prophesies of doom. True, there have been bumps along the road: China has weathered a few storms and some small bubbles have been pricked, but nothing that can be called an epic disaster caused by an epic spree of hyper-investing. Actually, the time has come to acknowledge a truth: either conventional economic theory will have to be rewritten, or China will eventually collapse. The two cannot coexist. I would venture a 50 per cent wager on China actually trumping conventional theory. Why do I say that? Because by investing on a scale hitherto unknown and untested, China may have defined a new 'escape velocity' of capital spending. By putting so much capital, not in factories, but in infrastructure, China may have escaped the 'gravitational pull of low thresholds'. Big factories create waste, while big infrastructure, especially life-enhancing social assets, empowers people. The sheer scale of your activities could end up swelling the tide in which everybody and everything rises together; a new model of 'tidal wave investing' could buoy the whole ocean to a much higher watermark.

India is a classic textbook case. If 200 years of economic theory is sound, then India simply must succeed in creating an America and Japan-like miracle. Continuing to infuse physics into economics, India's growth is like the 'wave theory': closer to the epicentre the waves are tiny, densely packed, and look really small. But as they spread outward, they pick up cascading strength, making larger and stronger concentric ripples. That could be India's model - micro changes picking up energy, pumping up a balloon of spreading prosperity.

But I would still venture no more than a 50 per cent bet on India, because we are at a critical crossroads in economic history. In stock market parlance, China is the 'beta stock': it could give wildly high returns, or it could sink like a stone. India is the 'defensive scrip' which may not leap to the stratosphere, but is also unlikely to fall too much from where it is. If China scales the summit, it will force a rewrite of economic textbooks. If India ascends to the top, it will reinforce the strength of conventional wisdom.

With telling insights into the two Asian powers' histories, polities, economies and cultures, Superpower? The Amazing Race Between China's Hare and India's Tortoise is a brilliantly written, superbly documented, rich and comprehensive account of the race to dominance between the two neighbours.

If 200 years of economic theory is sound, then India simply must succeed in creating an America- and Japan-like miracle. Continuing to infuse physics into economics, India's growth is like the 'wave theory': closer to the epicentre, the waves are tiny, densely packed, and look really small.